Review

1. Which of the following refers to a sequence of payments made at equal intervals or period of
time? A
A. Annuity B. Cash value C. Simple Interest D. Stocks

2. Which statement below describes a general annuity?

A. An annuity where the payment interval is the same as the interest period.
B.An annuity in which payments begin and end at definite times.
C.A type of annuity in which payments are made at beginning of each payment D
interval.
D.An annuity where the payment interval is not the same as the interest period.
3. Solve for the future value:

Semi-annual payments of P500 at the end of each term for 10 years

with the interest rate of 5% compounded semi-annually.

Php 12, 772.33

 PRESENT VALUE and PERIOD OF
DEFERRAL OF A DEFERRED ANNUITY
Learning Objectives

At the end of the lesson, you should be able to:

1. identify the period of deferral, and

2. calculate the present value of a deferred annuity.
Definition of a Term: PRESENT VALUE & PERIOD OF DEFERRAL
OF A DEFERRED ANNUITY

- it is an annuity that does not begin until a

Deferred Annuity given time interval has passed

Examples:
1. A credit card company offering its clients to purchase today but to start
paying monthly with their choice of term after 3 months.

2. A real estate agent is urging a condominium unit buyer to purchase now

and start paying after 3 years when the condominium is ready for
occupancy.
Definition of a Term: PRESENT VALUE & PERIOD OF DEFERRAL
OF A DEFERRED ANNUITY

- time between the purchase of an annuity and

Period of Deferral the start of the payments for the deferred
annuity.

Example. Find the period of deferral in the differed annuity below.

1. Monthly payments of P50,000 for 3 years that will start 8 months from now.
Answer: The first payment is at 8. The period of deferral is from time 0 to 7,
which is equivalent to 7 periods or 7 months.
2. Annual payments of P2,500 for 24 years that
will start 12 years from now.

Answer: The first payment is at 12. The period of deferral is from time 0
to 11, which is equivalent to 11 periods or 11 years.
 PRESENT VALUE OF A DEFERRED
ANNUITY
1−(1+𝑗)−(𝑘+𝑛) 1− (1+𝑗)−𝑘
P=𝑅 −𝑅
𝑗 𝑗

Where:
R – is the regular payment;
j – is the interest rate per period
n – mt- is the number of payments (actual payments)
k – is the number of conversion periods in the period of
deferral (artificial payments)
Group Activity

1. Suppose Mr. Gran wants to purchase a cellular phone. He

decided to pay monthly for 1 year starting at the end of the 4th
month. How much is the cost of the cellular phone if his monthly
payment is P 2,500 and interest is at 9% compounded monthly?

2. A credit card company offers a deferred payment option for the

purchase of any appliance. Rose plans to buy a smart television set
with monthly payments of P4,000 for 2 years. The payments will
start at the end of 3 months. How much is the cash price of the TV
set if the interest rate is 15% compounded monthly?
 Suppose Mr. Gran wants to purchase a cellular phone. He
decided to pay monthly for 1 year starting at the end of the 4th
Example 1: month. How much is the cost of the cellular phone if his
monthly payment is P 2,500 and interest is at 9%
compounded monthly?
Solution:
a. Given: R = 2,500 i12 = 9% = 0.09 t = 1 year m = 12
b. Find: Present Value, P
c. The time diagram. Mr. Gran pays starting at the end of the 4th month
to the end of the 15th month.
 d. Solve: k = 3 – period of deferral
𝑖 12 0.09
j= = = 0.0075 – interest per period
12 12
n = mt = 12(1) = 12 – number of payments

Using the formula of the present value of the deferred annuity,

− 𝑘+𝑛 −𝑘
1− 1+𝑗 1− 1+𝑗
𝑃=𝑅 −𝑅 Thus, the
𝑗 𝑗
present value of
− 3+12 −3
P = 2,500
1 − 1 + .0075
.0075
− 2,500
1− 1 + 0.0075
0.0075
the cellular
1− 1.0075 −15 1− 1.0075 −3
phone is
P = 2,500 − 2,500
.0075 0.0075 P27,953.60.
P = 35 342.4874 – 7 388.8906

P = 27,953.60
 A credit card company offers a deferred payment option for the purchase of
any appliance. Rose plans to buy a smart television set with monthly
payments of P4,000 for 2 years. The payments will start at the end of 3
Example 2: months. How much is the cash price of the TV set if the interest rate is
15% compounded monthly?

Solution:
a. Given: R = 4,000 m = 12 i12 = 10% = .10 t = 2 years
b. Find: Present Value, P
c. The time diagram. The annuity is deferred for 2 months and it will go on for 2
years. The first payment is due at the end of 3 months, or at the end of the 3rd conversion
period.
 d. Solve: k = 2 – period of deferral
𝑖 12 0.15
j= = = 0.0125 – interest per period
12 12
n = mt = 12(2) = 24 – number of payments

Using the formula of the present value of the deferred annuity,

− 𝑘+𝑛 −𝑘
1− 1+𝑗 1− 1+𝑗
𝑃=𝑅 −𝑅
𝑗 𝑗 Thus, the present
1− (1+ .0125)−(2+24) 1− ( 1+0.0125)−2
value of the smart
P = 4,000
.0.0125
− 4,000
0.0125 television set is
1− (1.0125)(−26) 1− ( 1.0125)−2 P80 472.55.
P = 4,000 − 4,000
.0125 0.0125

P = 4 000(22.08125299) – 4 000(1.963115379)
P = 88 325.01196 – 7 852.461516
P = 80 472.55
 Let Us Practice

A. Find the period of deferral (k) in each of the following deferred

annuity problem.

1. Annual payments of P 8 000 for 12 years that will start 5 years

from now
4

2. Quarterly payments of P 5 000 for 8 years that will start 2 years 7

from now
B. Read the annuity problem below. Fill in the blanks in the
statements that follow.
A loan of P30,000 is to be paid monthly for 5 years that will
start at the end of 4 years. If interest rate is 12%
compounded monthly, how much is the monthly payment?

deferred
a. The type of annuity illustrated in the problem is __________.

b. The total number of payments is ____________. 60 (n)

c. The number of conversion periods in the period of

deferral is _____. 47 (k)

d. The interest rate per period is _________. 0.01 (j)

e. The present value of the loan is ________. 30,000 (P)

C. Solve the problem

Carla availed of a cash loan that gave her an option to pay P 10 000
monthly for 1 year. The first payment is due after 6 months. How much is
the present value of the loan if the interest rate is 12% compounded
monthly.

Php 107, 088.20